Skip to main content
SpringerLink
Log in

Mergers and Acquisitions: The Impact of Hiring Financial Advisors on Acquirer Shareholder Wealth in the US and UK Financial Services Sector

  • Chapter
  • First Online:
The Political Economy of Development in Southeastern Europe

Part of the book series: Contributions to Economics ((CE))

  • 542 Accesses

Abstract

We document the impact of financial advisors in the announcement returns of M&A deals for the UK and the US financial services sectors. Our sample includes 1438 M&A deals announced during the period January 1999 to January 2010. The acquirer in these deals is a UK or US public listed firm in the financial sector, but there are no restrictions for the country of origin, the sector, or the listing status for the target firms. We provide some contrary evidence to prior studies that documented a positive relationship between various measures of financial advisor quality and M&A returns. Our results show that acquiring firms performing in-house M&As, rather than hiring financial advisors, have consistently achieved higher abnormal returns. Furthermore, acquiring firms hiring top-tier advisors within our sample achieve lower abnormal returns than the acquirers hiring lower-tier advisors. In addition, acquiring firms hiring top-tier advisors achieve low (negative) returns in M&As where targets are publicly listed. However, consistent with prior research, our findings suggest that top-tier advisors are able to achieve the highest deal completion rates amongst any other tier of advisors and commanded the highest fees. The question thus also revolves around not only whether financial advisors add value but rather whether their added value and knowledge also seem to be compensated by the huge sums of money they get paid. Achieving higher returns will be a justification of financial advisory excellence and higher premium fees. Overall, returns around the M&A announcement in this sector are perceived pessimistically. Our results also imply that financial advisors are not equally important across all deal types. Top-tier advisors perform much more complex deals which are on average at least ten times larger in size than any other M&A deal.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 84.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 109.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    First tier advisors are financial advisers that have greater than 10% market share. The second tier advisors are the financial advisers with less than 10% market share and more than 1%. The third tier includes financial advisors with market between 0.4% and 1%.

  2. 2.

    Brown and Warner (1980) claim that on average the values of αi and βi will equal to zero and the market beta, which is one, respectively, if the sample of individual firms is randomly selected from the population of all listed firms. As a result in this case, the market-adjusted model may generate more accurate abnormal return estimates. However, in this study, sample firms are all selected from the financial industry; therefore, this assumption is not valid, so the market model is chosen as the preferable benchmark.

References

  • Amel, D., Barnes, C., Panetta, F., & Salleo, C. (2004). Consolidation and efficiency in the financial sector: A review of the international evidence. Journal of Banking and Finance, 28(10), 2493–2519.

    Article  Google Scholar 

  • Amihud, Y., DeLong, G. L., & Saunders, A. (2002). The effects of cross-border bank mergers on bank risk and value. Journal of International Money and Finance, 21(6), 857–877.

    Article  Google Scholar 

  • Anderson, C. W., Becher, D. A., & Campbell II, T. L. (2004). Bank mergers, the market for bank CEOs, and managerial incentives. Journal of Financial Intermediation, 13(1), 6–27.

    Article  Google Scholar 

  • Bao, J., & Edmans, A. (2011). Do investment banks matter for M&A returns? Review of Financial Studies, 24(7), 2286–2315.

    Article  Google Scholar 

  • Barney, J. B. (1988). Returns to bidding firms in mergers and acquisitions: Reconsidering the relatedness hypothesis. Strategic Management Journal, 9(S1), 71–78.

    Article  Google Scholar 

  • Berger, A. N., DeYoung, R., Genay, H., & Udell, G. F. (2000). Globalization of financial institutions: Evidence from cross-border banking performance. Brookings-Wharton Papers on Financial Services, 2000(1), 23–120.

    Article  Google Scholar 

  • Biswas, R., Fraser, D. R., & Mahajan, A. (1997). The international market for corporate control: Evidence from acquisitions of financial firms. Global Finance Journal, 8(1), 33–54.

    Article  Google Scholar 

  • Bliss, R. T., & Rosen, R. J. (2001). CEO compensation and bank mergers. Journal of Financial Economics, 61(1), 107–138.

    Article  Google Scholar 

  • Bloomberg, Bloomberg Professional. (2012). https://www.bloomberg.com/professional/expertise/universities

  • Bodnaruk, A., Massa, M., & Simonov, A. (2009). Investment banks as insiders and the market for corporate control. Review of Financial Studies, 22(12), 4989–5026.

    Article  Google Scholar 

  • Boehmer, E., Masumeci, J., & Poulsen, A. B. (1991). Event-study methodology under conditions of event-induced variance. Journal of Financial Economics, 30(2), 253–272.

    Article  Google Scholar 

  • Boubakri, N., Dionne, G., & Triki, T. (2008). Consolidation and value creation in the insurance industry: The role of governance. Journal of Banking and Finance, 32(1), 56–68.

    Article  Google Scholar 

  • Brown, S. J., & Warner, J. B. (1980). Measuring security price performance. Journal of Financial Economics, 8(3), 205–258.

    Article  Google Scholar 

  • Bruner, R. (2004). Where M&A pays and where it strays: A survey of the research. Journal of Applied Corporate Finance, 16(4), 63–76.

    Article  Google Scholar 

  • Capron, L., & Shen, J. (2007). Acquisitions of private vs. public firms: Private information, target selection, and acquirer returns. Strategic Management Journal, 28(9), 891–911.

    Article  Google Scholar 

  • Cartwright, S., & Schoenberg, R. (2006). Thirty years of mergers and acquisitions research: Recent advances and future opportunities. British Journal of Management, 17(S1), S1–S5.

    Article  Google Scholar 

  • Cornett, M. M., Hovakimian, G., Palia, D., & Tehranian, H. (2003). The impact of the manager–shareholder conflict on acquiring bank returns. Journal of Banking and Finance, 27(1), 103–131.

    Article  Google Scholar 

  • Creplet, F., Dupouet, O., Kern, F., Mehmanpazir, B., & Munier, F. (2001). Consultants and experts in management consulting firms. Research Policy, 30(9), 1517–1535.

    Article  Google Scholar 

  • Daniels, K., & Phillips, R. A. (2007). The valuation impact of financial advisors: An empirical analysis of REIT mergers and acquisitions. Journal of Real Estate Research, 29(1), 57–74.

    Google Scholar 

  • DataStream, Thomson Reuters. (2012). https://financial.thomsonreuters.com/en/markets-industries/academia-macro-research.html

  • Datta, D. K., Pinches, G. E., & Narayanan, V. (1992). Factors influencing wealth creation from mergers and acquisitions: A meta-analysis. Strategic Management Journal, 13(1), 67–84.

    Article  Google Scholar 

  • DeLong, G., & DeYoung, R. (2007). Learning by observing: Information spillovers in the execution and valuation of commercial bank M&As. The Journal of Finance, 62(1), 181–216.

    Article  Google Scholar 

  • Demsetz, H., & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences. The Journal of Political Economy, 93(6), 1155–1177.

    Article  Google Scholar 

  • Dimson, E., & Marsh, P. (1986). Event study methodologies and the size effect: The case of UK press recommendations. Journal of Financial Economics, 17(1), 113–142.

    Article  Google Scholar 

  • Fama, E. F., Fisher, L., Jensen, M. C., & Roll, R. (1969). The adjustment of stock prices to new information. International Economic Review, 10(1), 1–21.

    Article  Google Scholar 

  • Fang, L. H. (2005). Investment bank reputation and the price and quality of underwriting services. Journal of Finance, 60, 2729–2761.

    Article  Google Scholar 

  • Francis, B., Hasan, I. and Sun, X. (2012) Home preference at selecting financial advisors in cross-border M&As’. Bank of Finland Research Discussion Paper (31).

    Google Scholar 

  • Fuller, K., Netter, J., & Stegemoller, M. (2002). What do returns to acquiring firms tell us? Evidence from firms that make many acquisitions. The Journal of Finance, 57(4), 1763–1793.

    Article  Google Scholar 

  • Golubov, A., Petmezas, D., & Travlos, N. G. (2012). When it pays to pay your investment banker: New evidence on the role of financial advisors in M&As. The Journal of Finance, 67(1), 271–311.

    Article  Google Scholar 

  • Hackethal, A., Haliassos, M., & Jappelli, T. (2012). Financial advisors: A case of babysitters? Journal of Banking and Finance, 36(2), 509–524.

    Article  Google Scholar 

  • Hagendorff, J., & Keasey, K. (2009). Post-merger strategy and performance: Evidence from the US and European banking industries. Accounting and Finance, 49(4), 725–751.

    Article  Google Scholar 

  • Hagendorff, J., Collins, M., & Keasey, K. (2008). Investor protection and the value effects of bank merger announcements in Europe and the US. Journal of Banking and Finance, 32(7), 1333–1348.

    Article  Google Scholar 

  • Hayward, M. L. (2003). Professional influence: The effects of investment banks on clients’ acquisition financing and performance. Strategic Management Journal, 24(9), 783–801.

    Article  Google Scholar 

  • Hunter, W. C., & Jagtiani, J. (2003). An analysis of advisor choice, fees, and effort in mergers and acquisitions. Review of Financial Economics, 12(1), 65–81.

    Article  Google Scholar 

  • Ismail, A. (2010). Are good financial advisors really good? The performance of investment banks in the M&A market. Review of Quantitative Finance and Accounting, 35(4), 411–429.

    Article  Google Scholar 

  • Jang, Y., & Lee, J. (1998). Factors influencing the success of management consulting projects. International Journal of Project Management, 16(2), 67–72.

    Article  Google Scholar 

  • Jemison, D. B., & Sitkin, S. B. (1986). Corporate acquisitions: A process perspective. Academy of Management Review, 11(1), 145–163.

    Article  Google Scholar 

  • Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329.

    Google Scholar 

  • Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48(3), 831–880.

    Article  Google Scholar 

  • Jensen, M. (2001). Value maximisation, stakeholder theory, and the corporate objective function. European Financial Management, 7(3), 297–317.

    Article  Google Scholar 

  • Jensen, M. C. (2010). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 22(1), 32–42.

    Article  Google Scholar 

  • Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

    Article  Google Scholar 

  • Kiymaz, H. (2004). Cross-border acquisitions of US financial institutions: Impact of macroeconomic factors. Journal of Banking and Finance, 28(6), 1413–1439.

    Article  Google Scholar 

  • MacKinlay, A. C. (1997). Event studies in economics and finance. Journal of Economic Literature, 35(1), 13–39.

    Google Scholar 

  • Maksimovic, V., & Phillips, G. (2002). Do conglomerate firms allocate resources inefficiently across industries? Theory and evidence. The Journal of Finance, 57(2), 721–767.

    Article  Google Scholar 

  • Malmendier, U., & Tate, G. (2008). Who makes acquisitions? CEO overconfidence and the market’s reaction. Journal of Financial Economics, 89(1), 20–43.

    Article  Google Scholar 

  • Marks, M. L., & Mirvis, P. H. (2001). Making mergers and acquisitions work: Strategic and psychological preparation. The Academy of Management Executive, 15(2), 80–92.

    Google Scholar 

  • Martenson, R. (2008). How financial advisors affect behavioral loyalty. International Journal of Bank Marketing, 26(2), 119–147.

    Article  Google Scholar 

  • Masulis, R. W., Wang, C., & Xie, F. (2007). Corporate governance and acquirer returns. The Journal of Finance, 62(4), 1851–1889.

    Article  Google Scholar 

  • McLaughlin, R. M. (1992). Does the form of compensation matter?: Investment banker fee contracts in tender offers. Journal of Financial Economics, 32(2), 223–260.

    Article  Google Scholar 

  • Moeller, S. B., Schlingemann, F. P., & Stulz, R. M. (2004). Firm size and the gains from acquisitions. Journal of Financial Economics, 73(2), 201–228.

    Article  Google Scholar 

  • Moeller, S. B., Schlingemann, F. P., & Stulz, R. M. (2005). Wealth destruction on a massive scale? A study of acquiring-firm returns in the recent merger wave. The Journal of Finance, 60(2), 757–782.

    Article  Google Scholar 

  • Nahavandi, A., & Malekzadeh, A. R. (1988). Acculturation in mergers and acquisitions. Academy of Management Review, 13(1), 79–90.

    Article  Google Scholar 

  • Nikolova, N., Reihlen, M., & Schlapfner, J. (2009). Client–consultant interaction: Capturing social practices of professional service production. Scandinavian Journal of Management, 25(3), 289–298.

    Article  Google Scholar 

  • Officer, M. S., Poulsen, A. B., & Stegemoller, M. (2009). Target-firm information asymmetry and acquirer returns. Review of Finance, 13(3), 467–493.

    Article  Google Scholar 

  • Raghavendra Rau, P. (2000). Investment bank market share, contingent fee payments, and the performance of acquiring firms. Journal of Financial Economics, 56(2), 293–324.

    Article  Google Scholar 

  • Rau, R. P., & Rodgers, K. (2002). Do bidders hire top-tier investment banks to certify value? (Purdue University Working Paper, AFA 2002 Meetings).

    Google Scholar 

  • Rhee, M., & Valdez, M. E. (2009). Contextual factors surrounding reputation damage with potential implications for reputation repair. Academy of Management Review, 34(1), 146–168.

    Article  Google Scholar 

  • Rosen, R. J. (2006). merger momentum and investor sentiment: The stock market reaction to merger announcements. The Journal of Business, 79(2), 987–1017.

    Article  Google Scholar 

  • Russo, A., & Perrini, F. (2006). The real cost of M&A advice. European Management Journal, 24(1), 49–58.

    Article  Google Scholar 

  • Schrah, G. E., Dalal, R. S., & Sniezek, J. A. (2006). No decision-maker is an island: Integrating expert advice with information acquisition. Journal of Behavioral Decision Making, 19(1), 43–60.

    Article  Google Scholar 

  • Servaes, H., & Zenner, M. (1996). The Role of investment banks in acquisitions. The Review of Financial Studies, 9(3), 787–815.

    Article  Google Scholar 

  • Song, W., Wei, J. D., & Zhou, L. (2013). The value of “boutique” financial advisors in mergers and acquisitions. Journal of Corporate Finance, 20, 94–114.

    Google Scholar 

  • Sprecher, C. R., & Perti, M. A. (2005). Large losses, risk management and stock price. The Journal of Risk and Insurance, 50(1), 107–117.

    Article  Google Scholar 

  • Thomson One Banker, Thomson Reuters. (2012). http://banker.thomsonib.com

  • Travlos, N. G. (1987). Corporate takeover bids, methods of payment, and bidding firms’ stock returns. The Journal of Finance, 42(4), 943–963.

    Article  Google Scholar 

  • Zeithaml, V. A. (1988). Consumer perceptions of price, quality, and value: A means-end model and synthesis of evidence. The Journal of Marketing, 2–22.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Kingston University, Kingston, England

    Bachir Sahyoun, George Giannopoulos & Yannis Anagnostopoulos

  2. Piraeus University of Applied Sciences, Athens, Greece

    Nicos Sykianakis

Authors
  1. Bachir Sahyoun
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. George Giannopoulos
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Yannis Anagnostopoulos
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Nicos Sykianakis
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Editors and Affiliations

  1. Department of International and European Studies, University of Piraeus, Piraeus, Greece

    Spyros Roukanas

  2. Department of Accounting and Finance, Technological Educational Institute of Central Macedonia, Serres, Greece

    Persefoni Polychronidou

  3. Eastern Macedonia and Thrace Institute of Technology, Kavala, Greece

    Anastasios Karasavvoglou

Rights and permissions

Reprints and permissions

Copyright information

© 2018 Springer International Publishing AG, part of Springer Nature

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Sahyoun, B., Giannopoulos, G., Anagnostopoulos, Y., Sykianakis, N. (2018). Mergers and Acquisitions: The Impact of Hiring Financial Advisors on Acquirer Shareholder Wealth in the US and UK Financial Services Sector. In: Roukanas, S., Polychronidou, P., Karasavvoglou, A. (eds) The Political Economy of Development in Southeastern Europe. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-93452-5_10

Download citation

Publish with us

Policies and ethics

Search

Navigation